Explained: Personal loans are on the rise, but is now the right time to take one?

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Against the backdrop of weak overall credit growth over the past year following the pandemic and declining economic activity, the personal lending (retail) segment has experienced a strong recovery, showing an increase in household debt as personal cash flow declined.

How did the growth go?

According to RBI data, the outstanding credit for the personal loans category increased by 12.1% from Rs 26 lakh crore in September 2020 to Rs 29.18 lakh crore in September 2021. During the same period, the overall growth of bank credit increased by only 6.7%.

The burst shows that growth was driven by “other” personal loans (which mainly include personal use cash loans), consumer durables and loans against gold jewelry. The outstanding amount of loans against gold jewelry rose sharply by 59.1%, from Rs 40,086 crore in September 2020 to Rs 63,770 crore in September 2021, and that of “other” personal loans jumped by 18 , 2%, from Rs 7 17,414 crore in September 2020 to Rs 8,47,788 crore. This was better than the 11.4% growth between September 2019 and September 2020, but lower than the 21.9% growth between August 2018 and August 2019. This segment has been one of the fastest growing in the four In recent years, more than double an excellent of Rs 4,11,100 crore in August 2017 to Rs 8,47,788 crore, and quadrupled from Rs 2,05,200 crore since 2014.

The loan for durable consumer goods increased by 40% from Rs 7,788 crore to Rs 10,904 crore in the last one year period.

What does it indicate?

Bankers say the high rate of growth in outstanding credit in other personal loans between 2014 and 2019 indicated an expansion of the consumer-driven economy, and the resumption of demand for personal loans in the Covid year ( September 2020 to September 2021) and a sharp increase in loan demand against gold jewelry indicates tension in individual income streams and in micro, small and medium-sized businesses’ cash flows.

Demand for durable consumer loans and other personal loans only increased in the last two months of the festivities, while new demand is driven more by optimism that the economy is recovering and the certainty of their income / cash flow in the future, according to bankers.

The jump in gold loans, say experts, is more due to the stress that small businesses have been facing over the past year. For many units across industries, declining demand impacted their cash flow and ability to pay employees. Pledging gold as collateral to meet financing needs has been a constant feature of the Indian gold market; small businesses use them for their working capital needs.

Why is personal credit growing?

Continuous improvement was expected due to the festival season, with higher consumer confidence due to the lower interest rate scenario and a gradual opening of the economy. However, any additional wave of Covid could limit growth. As the banking system is also overflowing with liquidity and industry use of credit remains lackluster, bankers are pushing retail lending for growth.

Interest rates have come down in all areas, especially for home loans which are now available at 6.40% from public sector banks such as Union Bank. The public sector units SBI and BoB have also focused on growing unsecured loans through their digital platforms. The home loan segment has also been driven by the growth in affordable housing. In addition, delinquencies are the lowest in this credit segment. Banks show more interest in gold loans because this collateral can be auctioned off if a loan becomes a non-performing asset.

Should we borrow for consumption?

With the economy not yet completely out of the woods, experts say individuals should avoid borrowing for non-essential consumer items. When incomes continue to be under pressure, they say now is the time to preserve cash for contingencies and not increase debt. Borrowing to offset a drop in income is a bad idea, and borrowing for non-essential consumption is even worse.

Taking out a loan for consumer needs or to finance a wedding may not be a good idea as repayment can be difficult if income is strained. Credit card outstanding increased from around Rs 10,000 crore in one year to Rs 115,641 crore in September 2021. As card companies and banks charge over 40% interest on these unpaid bills, this can increase the financial burden on consumers. “The demand for and access to consumer credit has undergone a paradigm shift in recent years as post-pandemic circumstances have further accelerated this shift,” said Rajesh Kumar, Managing Director and CEO of TransUnion Cibil.

What is the appreciation of the RBI?

The RBI has previously warned about the asset quality of banks’ retail portfolios and called for close monitoring of the basket. Consumer credit deteriorated after the end of the loan moratorium program in September 2020. The customer risk allocation of the credit workforce shifted slightly to the high risk segment in January 2021 compared to to January 2020. In terms of credit risk migration, even low risk levels show a downward momentum. “The consumer credit portfolios of non-PSBs are seeing signs of emerging stress. The demand for consumer credit also appears to have been shaken by the second wave of the pandemic. In the future, close monitoring of the asset quality of MSMEs and retail portfolios of banks is warranted, ”the RBI said in its Financial Stability Report released in July.

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